It took a while to calm down so I could write this blog post. About the 13th of February I received a notice from my credit card issuer, Capital One, informing me that the interest rate and other terms for my credit card were all going up:
"At Capital One, we are committed to providing valuable customers like you with honest and open communications. Today, we're notifying you that terms of your Capital One account are changing... Due to extraordinary changes in the economic environment, we're reviewing our existing credit card accounts. Having considered these economic conditions, your account's current Purchase rate, and the length of time you've had this rate and account, we will be increasing your Purchase rate. We're also raising your Cash Advance and Default rates."
This copy seemed so dishonest. If the bank is having difficulty and is losing money with decisions its executives made about asset-backed securities, then say so. This copy makes it sound like the bank is an innocent bystander or victim in this financial and economic mess. The last time I checked, Capital One received about $3.5 billion in bailout money from taxpayers to facilitate credit and lending. The notice didn't mention that fact, or thank us taxpayers for the huge loan. Based on the text in this notice, Capital One is doing the opposite: restricting credit and lending.
More from Capital One's notice:
"The following changes will be effective for all billing periods that begin after April 17, 2009:
Purchase and Balance Transfer Annual Percentage rate (APR): A variable rate equal to 17.9% as of 1/28/2009. Your purchase and balance transfer APR may vary monthly. The rate will be determined by adding 14.65% to the Prime rate."
So, my credit card interest rate is going up from 10% to 17.9%, or more since the rate will be variable. That's a huge increase. I definitely have feeling that I've been mugged.
And why the two conflicting dates? Which date is the correct date: April 17 or January 28? The notice should have been worded more clearly. Consumers shouldn't need a PhD in finance to read a notice from their credit card issuer. More from Capital One's notice:
"Cash Advance Annual Percentage Rate (APR): A variable rate equal to 24.9% as of 1/28/2009. Your cash APR may vary monthly. The rate will be determined by adding 21.65% to the Prime rate."
I'm one of the lucky consumers who is able to pay off my credit card balance every month in full and on time. So, I haven't incurred interest charges on my Capital One credit card since 2004, when I paid off all of my credit cards. With a credit score north of 790 (which is higher than 98% of Americans), my credit is good. I don't do balance transfers and cash purchases with my credit cards. So, while I'm unaffected by the interest rate hikes, it's the principle of the matter that irks me. And other consumers have complained recently about Capital One's rate increase notices.
But not everyone is so fortunate. These huge interest rate increases will hurt a lot of consumers, and make it far more difficult for good customers to continue paying. More from Capital One's notice:
"Default Annual Percentage Rate (APR): A variable rate equal to 29.4% as of 1/28/209. Your default APR may vary monthly. the rate will b determined by adding 26.15% to the Prime rate. If we receive your payment three or more days after your payment due date twice within any 12 billing periods, we may increase your APRs immediately to the above Default APR."
Wow! The bank wants to charge late payers almost 30% interest. How can a consumer ever get ahead with a high interest rate like that. That's robbery. Consider this craziness: in Hong Kong Citibank agreed to limit credit card interest rates to 45%. Can you believe that? 45 freakin' percent! How nice of Citibank! How customer friendly of the bank!
Around the 17th of February, I received a similar notice from Discover Bank. The interest rate and terms for my Discover credit card are going up, too:
"We are changing the Discover Cardmember Agreement. these changes apply to your Account effective for billing periods that end after May 1, 2009... We are modifying the "Default Rates" section to provide that the Default Rate is a variable rate... Each time you do not make a required payment on time (a Default rate Event), we may increase the standard Annual percentage Rate for purchases, balance transfers and cash advances to a variable rate equal to the Prime Rate + up to 27.99%, but such rate will never exceed 29.99% (the "Default rate). At the same time, any special rates on purchases, balance transfers or cash advances will end, and the Default Rate may apply. As of November 28, 2008, the maximum Default Rate would be an Annual Percentage Rate of 29.99%..."
An interest rate near 30%! Can you believe that? Again, I'm one of the lucky consumers who is able to pay off my credit card balance every month in full and on time. So, I haven't incurred interest charges on my Discover credit card since 2004, when I paid off all of my credit cards. But not everyone is so fortunate. These huge interest rate increases will hurt a lot of consumers.
I called my grown son (age 23) to warn him to watch his credit card statements for interest rate increases. I also advised him to pay off his credit card balances as soon as possible, so he doesn't get stuck in a bad situation where his credit card balances rise so fast that he can't pay his debts.
So, what's up with the banks and credit card issuers? Why these notices with huge interest rate increases?
Many consumers would say the banks are doing it because they can.Yesterday's blog post by guest-author Bill Seebeck provided a more detailed explanation. The banks lost money in the asset-backed securities marketplace and are using any means necessary to increase revenues to avoid more financial losses. If that means screwing consumers, so be it.
My list of reasons why banks are raising interest rates so high:
- Because they can
- To increase revenues from bad investments and poor decisions by their executives
- Expecting consumers with credit card balances are unable to pay off those balances before the higher interest rates start
- Betting that more consumers will be laid off from work during 2009, and those people will run up large credit card balances
- Comfortable that a compliant Congress won't do anything about it
If there's any good news, neither credit card issuer lowered the limits on my credit cards. That has happened to many consumers already. Will I shop around to switch to credit cards with better terms? You bet.
If you are furious (and I hope that you are) about these huge interest rate increases, I encourage you to contact your elected representatives in Congress and demand strong oversight
of the TARP money received by Capital One and other banks. You might also send a letter to
Richard D. Fairbank, Chairman and CEO of Capital One Financial Corporation (1680
Capital One Drive, McLean, VA 22102), and politely express your opinion regarding
this decision to alienate their strongest customer base. You can also write to David W. Nelms, CEO, Discover Financial Services (2500 Lake Cook Road,
Riverwoods, IL 60015).
If you have received a rate increase notice from your credit card issuer, please share your story below.